Client Alert

COVID-19 (Coronavirus): UK Government Responds with Introduction of Chapter 11 Lite and Suspension of Wrongful Trading Laws

30 Mar 2020

SUMMARY

This client alert summarises the recent announcement by the UK government concerning reforms to UK insolvency law to help struggling businesses, being:

  • US-style restructuring tools to allow companies to continue trading as they restructure their debt; and
  • A temporary suspension of wrongful trading laws to afford leniency to directors.

The UK government proposes to put the reforms to Parliament at the earliest opportunity.

This alert is relevant to disrupted, stressed, and distressed companies, as well as their directors and creditors.

CHAPTER 11 LITE COMING TO THE UK

The restructuring measures were first proposed in 2016 (see our commentary here) and subject to public consultation in 2018 (see our commentary here). Broadly, they introduce:

  1. A moratorium period. A short period where a debtor retains control of the company, and creditor claims are suspended while a company seeks to agree a restructuring with its creditors. That is, the usual rights to litigate, enforce judgments, or otherwise put a company into liquidation, administration, or to take other enforcement actions will not be available.
  2. A new restructuring plan. In addition to creditor voluntary agreements and schemes of arrangement, there will be a new type of restructuring plan, whereby a company can (with the consent of at least 75% of its creditors) effect a binding plan which “crams down” dissenting creditors across different classes.
  3. Protection for supplier contracts. Suppliers to a struggling company will no longer be able to terminate their contracts simply because the company is insolvent or undergoing restructuring.

These changes will be supplemented with safeguards for creditors to ensure that they can be paid while a restructuring is negotiated.

The reforms are generally welcome, bringing the UK much closer to the US Chapter 11 framework. However, while the text of the bill is not yet available, there are likely to be some differences which could impact the effectiveness of the reforms:

  • Unlike the U.S. ipso facto rule, the protection for supplier contracts described above does not extend to customer contracts; and
  • There has been no mention that the grant of super priority security to facilitate debtor-in-possession financing (announced in 2016 but seemingly dropped following the 2018 public consultation) would be revived.

SUSPENSION OF WRONGFUL TRADING

As contemplated in our client alert here, the government will retrospectively suspend the law on wrongful trading with effect from 1 March 2020. Usually, directors could be personally liable for wrongful trading if they continued to trade when they:

  • Knew, or ought to have known, that there was no reasonable prospect of their company avoiding insolvency; and
  • Failed to take every step to minimise the potential loss to creditors.

The suspension of these rules, mirroring similar moves in Germany and Australia, will give directors the headroom they need to continue trading and utilise the government’s support packages (see our client alert here) with less risk of personal liability for making the wrong call.

CONCLUSION

The new restructuring tools set out above represent a much-anticipated overhaul of the UK’s regime, which has been largely untouched since 2003. This is a longer-term measure, and which many consider will make the UK a more attractive jurisdiction for the restructuring of domestic and foreign companies.

Meanwhile, the temporary suspension of wrongful trading will enable directors to continue to trade and make use of government support with less fear of personal liability.

We will be monitoring the situation as these reforms are brought into force.

Christopher Lloyd, London Trainee Solicitor, contributed to the drafting of this alert.

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